For businesses that rely on imported goods, tariffs can significantly increase operational costs. With global supply chains continuing to evolve and international trade regulations in flux, one of the most common questions asked by business owners and accountants alike is: are tariffs tax deductible? The answer is nuanced, depending on the nature of the expense, how it’s recorded, and the structure of your business.
In this comprehensive article, we will break down what tariffs are, how they’re treated by the IRS, and what strategies businesses can use to minimize their tax liability while staying compliant with federal tax law.
Understanding Tariffs: The Basics
Tariffs are taxes imposed by a government on goods and services imported from other countries. Their purpose is twofold: to generate revenue for the government and to protect domestic industries from foreign competition. In the U.S., tariffs are most commonly collected by U.S. Customs and Border Protection (CBP) at the point of entry.
Tariff rates vary widely depending on the product, its country of origin, and existing trade agreements. Some goods may face no tariff, while others are subjected to duties as high as 25% or more, particularly those from countries involved in trade disputes with the U.S.
Are Tariffs Considered a Tax by the IRS?
Although tariffs are colloquially referred to as “import taxes,” they are not considered income taxes or employment taxes by the IRS. Instead, they fall under the category of a cost of goods sold (COGS) or an ordinary and necessary business expense, depending on how the imported goods are used by the business.
This distinction is important because it dictates how—and whether—tariffs are tax deductible for business owners and importers.
Are Tariffs Tax Deductible?
Yes, tariffs are generally tax deductible—but not in the same way that income taxes or payroll taxes are. Instead, tariffs are typically treated as part of the landed cost of imported goods, meaning they are included in inventory costs and become deductible when the inventory is sold.
There are two primary ways tariffs may affect your business tax return:
- Through Cost of Goods Sold (COGS): If your business imports products for resale, the tariffs paid become part of the COGS. This means you won’t deduct them immediately but will instead deduct them when the goods are sold. The IRS allows businesses to include customs duties, shipping fees, and insurance in inventory valuation.
- As a Business Expense: In limited cases—such as if the imported goods are used directly in business operations and not held for resale—tariffs may be treated as an ordinary and necessary business expense under IRC Section 162.
Deducting Tariffs as Part of COGS
When importing inventory, all direct costs associated with getting the product ready for sale—including tariffs—are capitalized into inventory and deducted later under COGS. This accounting treatment aligns with IRS Publication 538, which explains how businesses should handle inventory and costs.
Example:
Suppose your business imports $100,000 worth of electronics from China, and you pay $15,000 in tariffs. You would capitalize the $115,000 total cost into your inventory account. When you sell that inventory, you deduct the full $115,000 as part of your COGS, reducing your taxable income.
Deducting Tariffs as Business Expenses
In some cases, tariffs can be deducted as ordinary business expenses in the year they are incurred—if the imported goods are used directly in business operations. For instance, if your company imports specialized equipment subject to a tariff and uses that equipment in production (not for resale), you may be able to deduct the cost—including the tariff—under Section 162.
However, large capital assets may need to be depreciated rather than deducted all at once. In such cases, the tariff is included in the depreciable basis of the asset and deducted over time.
Example:
A manufacturer imports a $250,000 machine with a $25,000 tariff. Instead of deducting $25,000 outright, the company includes it in the asset’s basis and depreciates the full $275,000 according to IRS guidelines under MACRS (Modified Accelerated Cost Recovery System).
When Are Tariffs Not Deductible?
- Personal Use Imports: If the imported item is for personal use rather than business use, the tariff is not deductible.
- Non-Documented Expenses: If your business cannot substantiate the tariff payment with documentation (such as CBP Form 7501), the IRS may disallow the deduction.
- Errors in Classification: Incorrectly classifying the imported goods or tariffs may result in audit issues and denial of deductions.
Best Practices for Businesses Dealing With Tariffs
- Maintain Detailed Records: Documentation is critical. Keep invoices, customs entry forms, and shipping records for all imports. Ensure these documents show the amount paid in tariffs, duties, and other fees.
- Classify Inventory Accurately: Work with an accountant or tax planning attorney to ensure your inventory and assets are classified properly. Misclassifying items can result in improper deduction treatment or even IRS penalties.
- Use Cost Segregation for Capital Assets: For high-value imports used in business operations, consider a cost segregation study. This can help accelerate depreciation and improve your tax position.
- Seek Refunds When Applicable: In some cases, businesses may be eligible for refunds of tariffs through programs like the Duty Drawback Program, which allows importers to reclaim duties on goods that are later exported.
- Explore Free Trade Agreements and HTS Codes: Careful selection of HTS (Harmonized Tariff Schedule) codes and leveraging applicable Free Trade Agreements (FTAs) can reduce or eliminate tariff liability altogether.
How Tariffs Affect Small Businesses Differently
Small and medium-sized businesses often face greater challenges in managing tariffs due to tighter cash flow and fewer internal resources. These businesses are encouraged to work closely with customs brokers and professionals experienced in business tax compliance and import tax law.
Additionally, smaller importers may qualify for tax planning strategies that help minimize the burden of tariffs and duties. These include Section 179 expensing (for qualifying equipment) and R&D tax credits when imported materials contribute to qualifying innovation efforts.
The Role of a Tax Attorney in Managing Tariffs and Deductions
While a CPA or accountant handles day-to-day tax compliance, a tax attorney plays a strategic role in ensuring your business is legally protected and optimized for tax efficiency. At America’s Tax Defender, our team assists clients by:
- Reviewing import and tariff practices to ensure deductibility
- Advising on IRS audit defense in case of IRS or CBP scrutiny
- Structuring purchases and business operations for better tax treatment
- Representing clients in disputes related to improper classification or denied deductions
Having legal representation is especially critical when tariffs become part of larger business tax controversies, transfer pricing audits, or questions related to foreign supplier relationships.
Final Answer
The bottom line: Yes, tariffs are tax deductible, but how and when they are deducted depends on how your business uses the imported goods and how the costs are recorded. For resellers, tariffs are included in inventory and deducted as part of COGS. For other businesses, they may be treated as a direct expense or included in the asset basis for depreciation.
Understanding this distinction is key to avoiding errors and maximizing your deductions.
If your business relies on imports, you can’t afford to overlook how tariffs impact your business tax strategy. Speak with a qualified tax attorney to ensure your business is taking full advantage of every available deduction and complying with federal tax laws.
Need Help Navigating Tariffs and Tax Deductions?
At America’s Tax Defender, we help businesses across the United States—including importers, manufacturers, and retailers—navigate complex tax issues, including tariff deductions, inventory accounting, and IRS disputes. With an office in Tampa, Florida, and clients nationwide, we are your go-to partner for proactive tax defense and smart planning.
Schedule a consultation today and let us help you build a strategy that protects your business and your bottom line.
